Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of British Insurers (ABI)


  1.  It is too early to assess the impact of the Financial Services Action Plan (FSAP) on EU financial services markets. But our preliminary assessment is that it is likely to have relatively little positive effect on the retail markets, while the process of implementation may reveal significant additional regulatory costs.

  2.  We welcome the European Commission's thorough consultation on follow-up to the FSAP, and support the findings of the Commission's Insurance and Pensions Expert group. While the FSAP itself will soon be complete, the Commission has tabled several additional legislative proposals, and it is important that these should be got right. Beyond these, and some limited additional pressing issues, the main requirement at present is for a legislative pause, allowing national authorities to implement the FSAP measures, and business and consumers to digest the implications.

  3.  During such a pause, we hope that the Commission will take the lead in using its powers to maximise the opportunities afforded by existing EU legislation. The Commission will need to work in tandem with the Lamfalussy regulatory committees and national regulators to ensure consistent implementation of the FSAP, and to encourage convergence of national supervisory practice. This would do more to further a genuine single market in financial services than a raft of new legislative proposals. The ABI's members are committed to meeting their obligations under the FSAP, and to playing a full and constructive part in its implementation.


  4.  The Association of British Insurers (ABI) is the trade body for insurance companies operating in the United Kingdom. ABI has 390 members who provide approximately 95% of the insurance business written by companies in the UK, and are responsible for over 17% of the investments on the London Stock Exchange. ABI is grateful for the opportunity to provide views to the Select Committee on the review of the EU Financial Services Action Plan (FSAP).

  5.  The FSAP was launched by the European Commission in April 2000, following endorsement by the March 2000 Lisbon European Council. The FSAP contains 42 legislative measures, designed to further the completion of the Single Market in financial services. By April 2004, the EU institutions had adopted 38 out of the 42 measures.

  6.  To review progress on the FSAP, and to decide on follow-up action, the Commission established in November 2003 four expert groups of industry representatives. ABI was represented on the Insurance and Pensions expert group by Stephen Sklaroff, Deputy Director-General. The reports of the four expert groups were published for consultation in May 2004. In June 2004, the Commission held a Conference in Brussels to discuss the results. The consultation period ends in September 2004. Over the autumn, Commission staff will reflect on the responses, and make proposals to Commissioner McCreevy. Current expectations are that he will announce his plans early in 2005.


  7.  Agreement on the FSAP's legislative measures in such a short time represents a considerable bureaucratic achievement by the Commission, the Parliament and member states' Governments. But it is far too early properly to assess the impact of the FSAP on EU financial services markets. The Lamfalussy committees[1] have only just started working on the secondary legislation. Most FSAP measures have yet to be transposed into national legislation. And we have not begun to see how the market, and consumers will respond to these changes in the legislative framework.

  8.  As the ABI has made clear to the Commission, British insurers' initial analysis suggests that the FSAP measures will create few genuine new business opportunities, at least for EU retail insurance markets. On the other hand, there appear likely to be significant new costs, mainly as a result of overlapping, and sometimes contradictory, regulatory requirements.

  9.  This is a sobering reflection, as the FSAP was launched with the best of intentions on all sides. What went wrong? First, all parties were perhaps guilty of loading the FSAP with unrealistic expectations. With hindsight, this body of legislative measures could only have represented a small step towards the creation of a genuine Single Market in financial services. Secondly, some of the proposals were not thoroughly thought through, and the Commission might with advantage have given greater consideration to some of them prior to introduction. Thirdly, some member states backed away from the consequences of market-opening legislation in the course of negotiation, thereby adding to regulatory barriers. In considering the next steps on financial services regulation at EU level, pragmatic conclusions should be drawn from this experience. These conclusions are well set out in the reports of the Commission's four expert groups.


  10.  The regulatory goal for the FSAP was the creation of a truly integrated Single Market for financial services. The Commission paid particular attention to encouraging cross-border trade. At the macro-economic level, there are well-documented benefits in an integrated market in financial services, and this is therefore a legitimate regulatory goal for the wholesale capital markets. However, regulatory objectives need to recognise that integration may take a different form in retail markets, and particularly in retail insurance, where cultural and social differences between national markets mean that consumers are less inclined to buy products on a cross-border basis.

  11.  For example, policyholders prefer to buy insurance in their own language, and from an institution they know they will be able to contact easily in the unfortunate event of a claim. Local circumstances mean that policy terms often vary considerably from place to place. From the insurer's point of view, it is difficult to assess and price risk without a presence in the local market. Most policyholders therefore buy their insurance locally, and most pan-European insurers have chosen a business model based on establishment in the local market. The industry believes that this business model is just as capable of delivering open and competitive markets as models assuming large volumes of cross-border trade.

  12.  This is not to argue that there will never be a significant level of cross-border trade in retail insurance. Niche cross-border markets already exist, and over time we expect them to grow. Our argument is rather that the EU's regulatory objectives in retail insurance should not be predicated on market conditions which are as yet some way off, and in some sectors may never arise. We see a real risk that further legislation designed solely to promote cross-border trade would add to costs without creating opportunities for business, or increasing choice for policyholders.


  13.  Although the FSAP is more or less complete, the European Commission already has a heavy schedule of further legislation in hand, with significant implications for the insurance industry. The Reinsurance Directive will set prudential requirements and provide a single passport for reinsurers. The measures in the Corporate Governance Action Plan will establish common principles for corporate governance at EU level, a key factor in maintaining confidence in Europe's capital markets. The adoption of International Accounting Standards will—if all goes well—help put company accounts on a similar footing internationally. The most significant project for insurers is Solvency II, which will re-write the rules for the calculation of prudential solvency margins for insurers, based on a realistic assessment of risk.

  14.  These measures will lead to significant changes in the regulatory framework for insurance. And a successful outcome cannot be taken for granted: constant vigilance will be needed by the Commission to retain the market-opening thrust of these proposals. Nonetheless, the ABI supports all these measures, and is actively lobbying to get them right. The immediate priority for the Commission has to be the successful completion of these measures, already in the legislative pipeline.


  15.  The chart by the Comité Européen des Assurances (CEA) at Annex A shows the recent, almost exponential increase in EU regulatory measures affecting the insurance industry. As the Expert Group on Insurance and Pensions recommended in its report, the insurance industry is now in need of a legislative pause to digest the legislative changes already in the pipeline. "[a pause] will also provide a breathing space for industry dynamics to reshape the market and leverage the opportunities currently opening up in the new EU-wide and international markets."[2] The insurance industry is suffering from regulatory fatigue, and we are concerned that legislative overload, at national or at EU level, will cause internationally mobile business to leak away to other international finance centres.


  16.  We see a crucial role for the Commission in ensuring that the existing legislative programme is brought to a satisfactory conclusion. The Commission must also take a lead, co-operating with national authorities and the Lamfalussy Committees, in ensuring consistent implementation and enforcement of the existing legislative framework across the EU. In particular:

    —  the technical measures necessary to implement the FSAP need to be produced without adding to the regulatory burden, or to regulatory barriers;

    —  co-operation between national supervisors needs to be improved, leading to the designation of "lead" supervisors for multinational groups;

    —  the Commission should police more aggressively national implementation of the basic framework of the Life and Non-life Directives (which set much of the current framework for insurance business in the EU). Member states have abused the "general good" clauses in these Directives which permit the imposition of extra conduct of business rules. This is a major barrier to cross-border trade, and some of the worst examples should be challenged in the ECJ;

    —  Non-legislative measures should be developed to increase consumer confidence, building on existing complaint networks FIN-NET and SOLVIT; and

    —  the Commission should where appropriate make more use of its competition powers to open markets—though these are of limited value in a heavily regulated field.

  17.  Carrying out this work thoroughly, in addition to concluding the current raft of legislation already on the table, represents a major task for the Commission. By taking on this role during a legislative pause of the kind proposed, the Commission could make a huge step towards a genuine single EU retail financial services market.


  18.  In the past, the Financial Services Authority has sometimes been too willing to "gold plate" EU legislation. This can happen for understandable reasons, as, in each individual case, there may be a good reason for going beyond EU legislation. Indeed, in some cases it is necessary to do so to ensure a genuinely level playing field. However, the avoidance of unnecessary gold-plating is essential if significant increases in UK regulatory burdens are to be avoided.

  19.  The London international insurance market, which is the leading global market for large and high-risk insurance, is also very worried by the UK's—perhaps understandable—tendency to implement EU Directives more quickly, and in a more thoroughgoing (and hence burdensome) manner, than is the custom in many large Continental markets. While perhaps not technically falling under the heading of gold-plating, the result is the same: internationally mobile insurance capital is increasingly likely to move elsewhere.

  20.  The ABI therefore welcomes the approach to implementation of EU legislation set out in the FSA/Treasury/Bank of England report Delivering the FSAP in the UK. The implementation timelines in the report set out very clearly the scale of the task facing both regulatory authorities and the financial services industry over the next two years. In particular, we welcome:

    —  The objective of providing three months of regulatory certainty before business is required to operate the new rules.

    —  The commitment to thorough consultation with industry interests.

    —  The systematic production of Regulatory Impact Assessments.

    —  The presumption against gold-plating.

    —  The commitment to co-operate with other member states' authorities.

    —  The account to be taken of the impact on the competitiveness of British business.

    —  The development and publication of cost/benefit analysis.

  21.  These commitments, if implemented, would put the financial services industry on a better footing for the transposition task ahead.


  22.  We have called for a regulatory pause. However, it would be unhealthy for the legislative framework to be set in stone. It will in due course need to be updated to take account of developments in the market. ABI encourage the Commission to adopt a more deliberate approach to legislation than was possible at the launch of the FSAP.

  23.  ABI agrees with the report of the Financial Services Committee (Report on Financial Integration) that the first step, before considering the appropriate level of policy response, is thorough analysis of the market in question. It is not sufficient to rely on high level market integration theory, as a cost/benefit analysis will need to demonstrate benefits at the level of the individual markets. For example, as we have said earlier, the wholesale insurance market will need to be considered separately from the retail market.

  24.  Market analysis will show whether there is prima facie a market failure. In considering the policy response to market failure, the Commission should give preference where possible to non-legislative solutions.

  25.  Any legislative proposals at EU level should be subject to thorough consultation, especially among market participants, and rigorous cost/benefit analysis, in accordance with the Commission's Better Regulation Action Plan.

  26.  Finally, Europe's regulators should bear in mind the international competitiveness of European insurers, and the attractiveness of Europe's financial centres as places to do business.

September 2004


1   In 2000 a Committee of Wise Men (chaired by Baron Lamfalussy) was appointed to recommend a new decision-making procedure for the adoption of EU legislation affecting the securities markets. The central principle is that primary legislation at EU level should be restricted to establishing the legislative framework. A committee of national regulators (Committee of European Securities Regulators, CESR) was established to work up technical implementing measures in secondary legislation. Extended to banking, insurance and conglomerates legislation in 2002, the Lamfalussy process is designed to improve the quality and effectiveness of EU financial services legislation. Back

2   Report by Expert Group on Insurance and Pensions, published in May 2004. Back

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